Posts from hacking finance

I’ve been writing about the Bitcoin blocksize debate here at AVC (the only place I write and I’m hard core about that) for the past year. It’s a big deal. At the core of the debate is whether the Bitcoin blockchain should be a settlement layer that supports a number of new blockchains that can be scaled to achieve various goals or whether the Bitcoin blockchain itself should evolve in a way that it can scale to achieve those various goals.

In my simple mind I liken it to this. Should Bitcoin be Gold or should Bitcoin be Visa. If it is Gold, it’s a store of wealth and something to peg value to. If it is Visa, then its a transactional network that can move wealth around the globe in a nanosecond.

Mike Hearn, one of the early members of the Bitcoin core developer team, published a blog post yesterday stating that “Bitcoin Has Failed” in which he explains that the block size stalemate plus a few other big issues have led him to believe that Bitcoin is now a failed experiment.

When one of the most important people in Bitcoin states something like that you have to listen. I read his entire post a couple times. And I generally agree with his description of what has happened and, more importantly, what has not happened. I’m not ready to declare that Bitcoin has failed. But I’ve always viewed Bitcoin as an experiment that could fail and I still do. I personally own a material amount of Bitcoin, but in our personal asset allocation it is at the very bottom, below our wine collection. And I’m not a wine collector.

In every Bitcoin investment we’ve made at USV, and we’ve made four with multiple rounds in one, we have identified the failure of Bitcoin as a core risk element. We haven’t stopped including that in our risk factors. So we have our eyes wide open about the fragility of Bitcoin. But we also have our eyes wide open about the potential and the importance of this technology.

I personally believe we will see a fork accepted by the mining community at some point this year. And that will come with a new set of core developers and some governance about how decisions are made among that core developer team. But it could well take a massive collapse in the price of Bitcoin, breakdowns in the Bitcoin network, or worse to get there. And all of that could cause the whole house of cards to come crashing down. Anything is possible. Even the return of Satoshi to fix things as an AVC regular suggested to me in an email this morning.

The Bitcoin experiment is six years old. There has been a significant amount of venture capital investment in the Bitcoin ecosystem. There are a number of well funded companies competing to build valuable businesses on top of this technology. We are invested in at least one of them. And the competition between these various companies and their visions has played a part in the stalemate. These companies have a lot to gain or lose if Bitcoin survives or fails. So I expect that there will be some rationality, brought on by capitalist behavior, that will emerge or maybe is already emerging.

Sometimes it takes a crisis to get everyone in a room. That’s how the federal budget has been settled for many years now. And that may be how the blocksize debate gets settled to. So if we are going to have a crisis, let’s get on with it. No better time than the present.

I’d encourage everyone interested in Bitcoin to read these posts as they address two of the most important issues facing Bitcoin today; how Bitcoin is governed and how Bitcoin’s transaction processing power should be scaled from its current levels to Visa/PayPal levels over the next 5-10 years.

There are many reasons why Bitcoin is so interesting but for me the core reason is the decentralized nature of the technology and how it is designed to operate and evolve. Bitcoin is political in the sense that it has a belief system and that is that no one person or entity should control it.

What we are seeing right now is a test of that belief system and how Bitcoin answers this test will say a lot about its future. I happen to agree with Brian’s views on both topics and I am glad that Brian and Coinbase is stepping up and taking a vocal position on both.

I think we can go further than that now and say that sometime in the past year or two the consumer internet/social/mobile gold rush ended.

Look at the top 25 apps in the US:

The top 6 mobile apps and 8 of the top 9 are owned by Facebook and Google. 10 of the top 12 mobile apps are owned by Apple, Facebook, and Google.

There isn’t a single “startup” on that list and the youngest company on that list is Snapchat which is now over four years old.

We are now well into a consolidation phase where the strong are getting stronger and it is harder than ever to build a large consumer user base. It is reminiscent of the late 80s/early 90s after Windows emerged as the dominant desktop environment and Microsoft started to use that dominant market position to move up the stack and take share in all of the important application categories. Apple and Google are doing that now in mobile, along with Facebook which figured out how to be as critical on your phone as your operating system.

I am certain that something will come along, like the Internet did in the mid 90s, to bust up this oligopoly (which is way better than a monopoly). But it is not yet clear what that thing is.

2015 saw some of the candidates for the next big thing underwhelm. VR is having a hard time getting out of the gates. Wearables and IoT have yet to go mainstream. Bitcoin and the Blockchain have yet to give us a killer app. AI/machine learning has great potential but also gives incumbents with large data sets (Facebook and Google) scale advantages over newcomers.

The most exciting things that have happened in tech in 2015 are happening in verticals like transportation, hospitality, education, healthcare, and maybe more than anything else, finance, where the lessons and playbooks of the consumer gold rush are being used with great effectiveness to disrupt incumbents and shake up industries.

The same is true of the enterprise which also had a great year in 2015. Slack, and Dropbox before it, shows how powerful a consumerish approach to the enterprise can be. But there aren’t many broad horizontal plays in the enterprise and verticals seems to be where most of the action was in 2015.

I’m hopeful that 2015 will also go down as the year we buried the Unicorn. The whole notion that getting a billion dollar price tag on your company was something necessary to matter, to be able to recruit, to be able to get press, etc, etc, is worshiping a false god. And we all know what happens to those who do that.

As I look back over 2014 and 2015, I feel like these two years were an inflection point, where the underlying fundamentals of opportunity in tech slowed down but the capital rushing to get invested in tech did not. That resulted in the Unicorn phase, which if it indeed is over, will be followed by an unwinding phase where the capital flows will need to line up more tightly to the opportunity curve.

I’m now moving into “What Will Happen” which is for tomorrow, so I will end this post now by saying goodbye to 2015 and hopefully to much of the nonsense that came with it.

I did not touch on the many important things that happened outside of tech in 2015, like the rise of terrorism in the western world, and the reaction of the body politic to it, particularly here in the US with the 2016 Presidential campaign getting into full swing. That certainly touches the world of tech and will touch it even more in the future. Again, something to talk about tomorrow.

I wish everyone a happy and healthy new year and we will talk about the future, not the past, tomorrow.

I’ll do the same tomorrow and friday, but today I’d like to talk about What Didn’t Happen, specifically which of my predictions in What Is Going To Happen did not come to be.

I said that the big companies that were started in the second half of the last decade (Uber, Airbnb, Dropbox, etc) would start going public in 2015. That did not happen. Not one of them has even filed confidentially (to my knowledge). This is personally disappointing to me. I realize that every company should decide how and when and if they want to go public. But I believe the entire startup sector would benefit a lot from seeing where these big companies will trade as public companies. The VC backed companies that were started in the latter half of that last decade that did go public in 2015, like Square, Box, and Etsy (where I am on the board) trade at 2.5x to 5x revenues, a far cry from what companies get financed at in the late stage private markets. As long as the biggest venture backed companies stay private, this dichotomy in valuations may well persist and that’s unfortunate in my view.

I said that we would see the big Chinese consumer electronics company Xiaomi come to the US. That also did not happen, although Xiaomi has expanded its business outside of China and I think they will enter the US at some point. I have a Xiaomi TV in my home office and it is a really good product.

I predicted that asian messengers like WeChat and Line would make strong gains in the US messenger market. That most certainly did not happen. The only third party messengers (not texting apps) that seem to have taken off in the US are Facebook Messenger, WhatsApp and our portfolio company Kik. Here’s a shot of the app store a couple days after the kids got new phones for Christmas.

I said that the Republicans and Democrats would find common ground on challenging issues that impact the tech/startup sector like immigration and net neutrality. That most certainly did not happen and the two parties are as far apart as ever and now we are in an election year where nothing will get done.

So I got four out of eleven dead wrong.

Here’s what I got right:

VR has hit headwinds. Oculus still has not shipped the Rift (which I predicted) and I think we will see less consumer adoption than many think when it does ship. I’m not long term bearish on VR but I think the early implementations will disappoint.

The Apple Watch was a flop. This is the one I took the most heat on. So I feel a bit vindicated on this point. Interestingly another device you wear on your wrist, the Fitbit, was the real story in wearables in 2015. In full disclosure own a lot of Fitbit stock via my friends at Foundry.

Enterprise and Security were hot in 2015. They will continue to be hot in 2016 and as far as this eye can see.

There was a flight to safety in 2015 and big tech (Google, Apple, Facebook, Amazon) are the new blue chips. Amazon was up ~125% in 2015. Google (which I own a lot of) was up ~50% in 2015. Facebook was up ~30% in 2015. Only Apple among the big four was down in 2015 and barely so. Oil on the other hand, was down something like 30% in 2015 and gold was down something like 15-20% in 2015.

Here’s what is less clear:

Bitcoin had a big comeback in 2015. If you look at the price of Bitcoin as one measure, it was up almost 40% in 2015. However, we still have not see the “real decentralized applications” of Bitcoin and its blockchain emerge, as I predicted a year ago, so I’m not entirely sure what to make of this one. And to make matters worse, we now seem to be in a phase where investors believe you can have blockchain without Bitcoin, which to my mind is nonsense.

Healthcare is, slowly, emerging as the next big sector to be disrupted by tech. The “trifecta” I predict will usher in an entirely new healthcare system (smartphone becomes the EMR, p2p medicine, and a market economy in healthcare) has not yet arrived in full force. But it will. It’s only a matter and question of when.

So, I feel like I hit .500 for the year. Not bad, but not particularly impressive either. But when you are investing, batting .500 is great because you can double down on your winners and stop out your losers. That’s why it is important to have a point of view, ideally one that is not shared by others, and to put money where your mouth is.

I’ve written about New York Fintech Innovation Lab here at AVC a bunch of times. It’s a great three month long program where entrepreneurs get mentoring on their businesses from executives at 25 large financial services companies including teams from the insurance, hedge fund, money management, and payments sectors, as well as teams from the 10 original money center banks who helped to found this program.

If you are starting or building a company that is focused on the fintech sector and would like some help on strategy, product market fit, and business development, this is a great program to consider.

The 2016 program application deadline is December 3rd, three weeks from today. You can apply here.

Bitcoin itself may never be more than a curiosity. However blockchains have a host of other uses because they meet the need for a trustworthy record, something vital for transactions of every sort. Dozens of startups now hope to capitalise on the blockchain technology, either by doing clever things with the bitcoin blockchain or by creating new blockchains of their own.

Obviously Bitcoin could become “nothing more than a curiosity” if all the action moves to other blockchains. But right now the Bitcoin blockchain has an order of magnitude more hashing power and market cap, so we are certainly not seeing any other blockchains developing the kind of network effects that Bitcoin has. Of course, that could change. It is something I check on at least once a week and will continue to do so.

But if we see “a host of other uses” materialize “by doing clever things with the bitcoin blockchain”, I have always assumed that would be a catalyst for Bitcoin itself, both in terms of value, but also liquidity and importance of the currency.

Samir Desai, founder and CEO of our portfolio company Funding Circle, which is the global leader in small business lending marketplaces, gave a great talk at Lendit this past week. It starts with a bit of an advertisement for Funding Circle, but Samir quickly gets into an explanation of why marketplace lending is a better way to do the loan business. If you want to understand why marketplace lending is growing massively around the world and why it is the future of the lending business, watch this video. It’s about 25mins long.

Putting together something like this is a major pain in the butt, but it is incredibly useful for people (like VCs and other investors) who are trying to make sense of an emerging market. It’s a great way to get your name and reputation out there. It reminds me of what Terry Kawaja did with ad:tech five or six years ago.

I could critique some of William’s placements (for example Coinbase is one of the top five exchanges in the world and yet is not included in that category), and I’m sure that countless companies are now reaching out to William saying “why are we not on your map?” So this will get picked apart and it will evolve. But the act of taking the time to put something like this together and publish it is incredibly useful for everyone. Kudos to William for doing that.

One of Bitcoin’s strongest voices is Jerry Brito, the Executive Director of Coin Center. This short (~6 min) interview he did with Foreign Affairs is a good example of his balanced and clear and crisp voice on Bitcoin.

Our portfolio company CircleUp is a marketplace where consumer goods companies raise equity capital from accredited investors. CircleUp is a registered broker dealer and does all of this in full compliance with securities laws. Over the past few years, CircleUp has helped 113 consumer goods companies raise over $130mm and they are growing quite rapidly now as entrepreneurs who are building consumer goods companies increasingly understand the value of raising in a marketplace model vs the old fashioned “knock on doors” model.

I think the growth rate will accelerate in the coming months as CircleUp launched a secondary market last week they called Rights+. First a bit about the importance of secondary markets and then I’ll talk about what makes Rights+ different from other secondary markets.

One of the big challenges for investors in private markets is the securities we buy are illiquid. That means most of the time we will need to hold the investment until “maturity” whatever that is. And in early stage investing, that can often be 5-10 years (or more). If you suddenly have a need for cash, you can’t easily sell your angel investments. If you think the company is being managed badly, you can’t easily sell your angel investment. So the illiquidity significantly increases the risk of an private investment vs a public market investment. If, on the other hand, you could easily sell your angel investment (at a loss or a gain) if you needed to raise cash or if you lost confidence in the management, I believe the market for angel and early stage investing would grow significantly. Lower the risk of illiquid early stage investing and you will see a lot more people interested in doing it and you will see the ones who are doing it allocate a larger portion of their investment capital to it.

When we invested in CircleUp back in May of 2013, I asked Rory and Ryan “when are you going to launch a secondary market?” I’ve always thought that the key to making a marketplace model work in early stage investing is the ability to easily do secondaries. And now, roughly two years later, they have done it.

Why did they take so long? Well there have been a number of problems with secondaries in the early stage market. First and foremost, the companies themselves don’t generally like the idea that their investors are selling in the secondary market. So they do all sorts of things to prevent it. And second, investors who buy a secondary often get no rights that come along with the securities they buy. In particular, they have no rights to information from the company to ascertain how the investment is doing.

So CircleUp decided to fix those things as part of their secondary market. CircleUp’s CEO Ryan told me this via email last week:

CircleUp Rights+ rights give investors the ability to sell shares early – including through the CircleUp marketplace. We’ve standardized the rights (transfer rights & information rights) to streamline the process. A key difference between this and previous secondary marketplaces is that it is fully integrated with the primary investments. Thus the companies themselves are actively giving these rights, which we think is key to success.

So when you decide to buy in an offering on CircleUp, you can see if the company is offering transfer rights. You can decide, for example, to only buy into offerings where there are transfer rights being offered. And you can sell these securities on CircleUp if you so wish.

This is a great thing for CircleUp, for the entrepreneurs who choose to raise capital on CircleUp, and for the investors who invest capital on CircleUp. And this shows others the path to creating a truly vibrant marketplace for private equity capital.

It would be nice for the accredited investor requirement to go away for smaller investment amounts so that this model could be opened up for all investors. Then we would really have something transformative. And maybe I would be out of business 🙂